Dr Gerard Lyons is a senior fellow at Policy Exchange. He was Chief Economic Adviser to Boris Johnson during his second term as Mayor of London.
Public sector net wealth (PSNW) may not sound like the most engaging of topics, yet this new way of looking at the public finances has the ability to transform the policy debate.
In addition to reporting the budget deficit and national debt as usual, the Office for National Statistics (ONS) now provides data on PSNW. This development could be important.
Currently, the fiscal outlook suggests little room for manoeuvre, as debt is high, interest rates are rising and growth prospects are modest.
When we look at public finances we do so in terms of debt and liabilities. There is a reason for this as the Government needs to fund itself.
The criticism of the present set-up is that it is not comprehensive enough and can give a misleading impression. The example being that if you borrow to fund public investment, such as a railway, then surely you should take note of the asset. The way to do this is to have a public sector balance sheet.
Fiscal conservatives, too, may wish to include a lot of off-balance sheet liabilities. This might include the high public costs associated with public-private partnerships in the UK or large unfunded future pension liabilities.
The aim is to have a comprehensive measure of the government’s finances. This makes sense.
In recent years, there has been a search for the best way to capture this. Even before PSNW, the ONS provided data for the balance sheet in terms of either: public sector net debt, which was seen as a narrow definition that included liquid assets and liabilities; and a broader measure than this called public sector net financial liabilities. Now, PSNW is available and includes financial and non-financial assets and liabilities.
It makes a big difference. In the last fiscal year the budget deficit was a high £139.2 billion and improving. In turn, the national debt was £2.5 trillion or 99.6 per cent of GDP, and reflected the danger of the UK falling into a debt trap if growth disappointed while interest rates remained high.
However, by looking at PSNW the picture would be transformed as three-quarters of the public sector’s liabilities would be offset by assets. A year ago, in March 2022, the PSNW would have been a deficit of £531.1 billion. By this March it was a deficit of £606 billion, but this is only one-quarter the size of the national debt.
But what does this actually mean?
A Government’s fiscal position is not the same as an individual’s or a company’s finances, as it can borrow to spend, change taxes, or even inflate the debt away. Similarly, a public sector balance sheet may be different too. One argument against PSNW is that a government may find it hard to sell many of its assets if it wanted to.
Yes, it can sell off prime properties in London, as any walk through Whitehall currently shows with new hotels and apartments. However, the government wouldn’t be able to sell many of the assets on its balance sheet. This might include roads in Scotland or through the Kent countryside.
The push back would be that all this should be priced into the balance sheet. Some assets will have a high price if to be sold, others no price, as there would be no buyers. With some, there is a future revenue stream. For instance, this is the underpinning of toll roads. With utilities too, people are charged for their use.
Could a greater focus on PSNW mean that a government may decide – and find it easier – to sell assets in future, such as schools or hospital buildings? There is no reason why not. Fire stations were sold in the last few years in London. Likewise with many police stations. One might argue that this is too transactional – to raise revenues to balance budgets – rather than strategic, such as converting police stations which are often in central locations into public goods such as local community centres as opposed to converting into private flats. Harold Macmillan, in different circumstances, called this selling off the family silver.
In theory, could one use the balance sheet to focus strategically on what makes more sense for government expenditure?
This might allow the Government to refocus the role of the state. Take privatisation during the 1980s. Then, the argument was not about the public sector balance sheet. It was about shrinking the size of the state, and the view that the private sector could run those companies better.
All the above might suggest fiscal conservatives may have less to fear. But in practice the idea of PSNW may be more enthusiastically endorsed by those seeking to justify large-scale public-sector investment. Such investment would be seen as creating an asset – so it should be justified and funded.
But the reality is that if you create an asset you still have to finance the liability – and there is no getting away from that. It has to be funded.
Some suggest it might make it easier to justify the case for nationalisation, since the cost of acquiring would be balanced by an asset being created. But the high cost of taking assets back into public hands might suggest otherwise.
There has always been a case to use fiscal policy when needed to stabilise the economy, as we saw in the pandemic. But the public finances need to be seen as being on a sustainable future path. Hence there have been various fiscal rules to achieve this and to keep the markets onside. Yet, often, fiscal rules are dropped at the first sign of trouble, and thus have proved to be meaningless. The exception, in my view, being the aim to bring debt to GDP down over time and thus avoid falling into a debt-trap.
After all, even with PSNW, the markets will need to be convinced about future fiscal trends and debt solvency. With PSNW there would be an argument for a new fiscal rule, say a net worth objective and for it to improve as a share of GDP over time.
It’s important that this debate is embraced, since this should allow a greater focus on the quality of spending such as on fixed infrastructure investment, not a justification for higher spending funded by rising taxes or increased borrowing.
One might see this not as an aim to replace current fiscal prudence, but to ensure a greater focus on where public expenditure takes place. It’s more than a balance sheet or accounting exercise and warrants attention on the impact of spending.
By using PSNW, who would argue against greater investment? For instance, funding a net zero agenda may be seen not only as necessary but may be seen as more affordable with this approach.
This, it could be argued, would justify prudent infrastructure investment. Remember, Peter Lilley famously said that “roads don’t vote”. His point, well put, being that it is public investment, not day to day spending on government consumption, that would be curbed if action on the public finances is needed.
The last thing the Conservatives want is to increase the size of the state further. A PSNW would likely empower increased public investment. It would show up on the asset side. But, as now, the deficit would still need to be funded. In addition to that, the move to a balance sheet may allow a greater focus on cutting wasteful expenditure and focus on where spending makes a genuine difference.